PHILEX MINING v.

CIR
G.R. No. 148187, April 16, 2008, THIRD DIVISION, (Ynares-Santiago,J.)

Deductions for income tax purposes partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction
claimed.

Petitioner Philex entered into an agreement with Baguio Gold Mining Corporation for the former to manage
the latter’s mining claim now as the Sto. Mine. The parties’ agreement was denominated as “Power of
Attorney”. The mine suffered continuing losses over the years, which resulted in petitioners’ withdrawal as
manager of the mine. The parties executed a “Compromise Dation in Payment”, wherein the debt of Baguio
amounted to Php. 112,136,000.00. Petitioner deducted said amount from its gross income in its annual tax
income return as “loss on the settlement of receivables from Baguio Gold against reserves and allowances”.
BIR disallowed the amount as deduction for bad debt. Petitioner claims that it entered a contract of agency
evidenced by the “power of attorney” executed by them and the advances made by petitioners is in the
nature of a loan and thus can be deducted from its gross income. Court of Tax Appeals (CTA) rejected the
claim and held that it is a partnership rather than an agency. CA affirmed CTA

ISSUE:

Whether or not the amount deducted from their gross income be considered a bad debt.

RULING:

NO. The amount paid by petitioner for the long-term loan obligation of Baguio God could not be allowed
as a bad debt deduction.

Perusal of the agreement denominated as the Power of Attorney indicates that the parties had intended to
create a partnership and establish a common fund for the purpose. They also had a joint interest in the
profits of the business as shown by a 50-50 sharing in the income of the mine.

Under the Power of Attorney, petitioner and Baguio Gold undertook to contribute money, property and
industry to the common fund known as the Sto. Niño mine. In this regard, we note that there is a substantive
equivalence in the respective contributions of the parties to the development and operation of the mine.

It should be stressed that the main object of the Power of Attorney was not to confer a power in 1avour of
petitioner to contract with third persons on behalf of Baguio Gold but to create a business relationship
between petitioner and Baguio Gold, in which the former was to manage and operate the latter’s mine
through the parties mutual contribution of material resources and industry. The essence of an agency, even
one that is coupled with interest, is the agent’s ability to represent his principal and bring about business
relations between the latter and third persons. Where representation for and in behalf of the principal is
merely incidental or necessary for the proper discharge of ones paramount undertaking under a contract,
the latter may not necessarily be a contract of agency, but some other agreement depending on the ultimate
undertaking of the parties.

In this case, the totality of the circumstances and the stipulations in the parties’ agreement indubitably lead
to the conclusion that a partnership was formed between petitioner and Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the Sto.
Niño mine upon termination, a provision that is more consistent with a partnership than a creditor-debtor
relationship. It should be pointed out that in a contract of loan, a person who receives a loan or money or
any fungible thing acquires ownership thereof and is bound to pay the creditor an equal amount of the same
kind and quality. In this case, however, there was no stipulation for Baguio Gold to actually repay petitioner
the cash and property that it had advanced, but only the return of an amount pegged at a ratio which the
managers account had to the owners account.

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross
income. Deductions for income tax purposes partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction
claimed. In this case, petitioner failed to substantiate its assertion that the advances were subsisting debts
of Baguio Gold that could be deducted from its gross income. Consequently, it could not claim the advances
as a valid bad debt deduction.